Collapsed Resolutions of Aircraft Insolvencies, End of an Icon: An in-Depth Analysis of the Jet Airways Case

The failure of airlines is an issue fraught with multifaceted reasons, particularly when it comes to insolvency and resolution procedures. Airlines, especially those with large fleets of leased aircraft, encounter distinct challenges during bankruptcy proceedings. Aircraft insolvencies involve not only the airline’s financial restructuring but also the legal complexities of recovering leased aircraft and enforcing creditors’ rights.

One of the most notable and recent airline insolvencies was that of Jet Airways¹, an Indian carrier, against which insolvency was triggered in 2019. This case serves as a critical example of the flaws in the airline resolution process. This article will examine the Jet Airways insolvency, discuss the legal frameworks related to aircraft insolvencies, and highlight the key failures within the resolution process.

This case provides a stark illustration of the shortcomings of the insolvency process for airlines and how aircrafts are handled in such proceedings.

Legal framework in aircraft insolvencies

In the context of airline insolvencies, two key legal aspects come into play, domestic bankruptcy laws and international agreements, such as the Cape Town Convention and its Aircraft Protocol. These frameworks are designed to provide a streamlined process to restructure of an airline’s debts or its liquidation, including facilitating the recovery of aircraft by lessors.

1. The Cape Town Convention: The Cape Town Convention on International Interests in Mobile Equipment², alongside the Aircraft Protocol, aims to simplify the process for securing interests in aircraft and provides a framework for the quick repossession of aircraft in the event of insolvency. This international legal instrument seeks to provide consistency for aircraft financiers and lessors in the case of an airline’s default.

2. Domestic bankruptcy laws: The Insolvency and Bankruptcy Code (IBC), in India governs the insolvency proceedings, including the insolvency of airlines. The law outlines the process for handling creditors’ claims, the distribution of assets (including aircraft), and the procedures for either restructuring the airline or its liquidation.

Background of the Jet Airways insolvency

Jet Airways, one of the India’s largest private carriers, had been facing significant financial troubles long before its grounding in 2019. It accumulated humongous debt, which led to the airline’s inability to service its obligations. As on its grounding, the airline owed over Rs. 8000 crores (approximately $1.1 billion) to various creditors, including banks, aircraft lessors, and vendors.

With over 100 aircraft in its fleet, the airline’s insolvency was highly complex owing to various stakeholders at play, including lessors, creditors, employees, and passengers.

The airlines went into insolvency, following an application under Section 7 of the IBC³, thus marking the beginning of a prolonged legal and financial battle.

The insolvency resolution professional (IRP) was appointed to manage the airlines’ affairs, wherein the primary objective was to find a resolution plan to revive the airlines. The IRP appointed to oversee the resolution process faced a series of challenges related to the airline’s fleet, largely composed of leased aircraft inter alia valuation and management of the aircraft, operational continuity, coordination between the stakeholders, governmental and regulatory issues, cash flow and liquidity issues.

As no viable resolution plan was tabled, a liquidation order was passed⁴, collapsing the revival process of the airlines. The liquidation, leading to the demise of one of India’s largest private airlines, a dominant force in the aviation industry for over 25 years, raised significant concerns about the viability of airline insolvencies under the IBC, highlighting the challenges of managing airlines, a capital-intensive businesses with vast fleets and complex operations, under the current framework. This underscores the need for specialised aviation regulations to better protect assets like aircraft and facilitate more efficient insolvency processes in the future.

Issues and shortcomings in the resolution process

1. Aircraft repossession and lessors’ rights: The resolution process faced significant challenges related to the repossession of leased aircraft. Although international leasing agreements typically provide lessors with the right to repossess aircraft in the event of insolvency, the IBC’s treatment of operational assets created difficulties. The lessors’ struggle to regain possession of their aircraft was particularly difficult, as IBC did not grant the same priority for repossession rights as international conventions like the Cape Town Convention did. Lessors were required to go through a lengthy judicial process to reclaim their aircraft, often at the expense of operational continuity for the airline. In some cases, the repossession of aircraft was further delayed by the airline’s assets being tied up in legal disputes.

Legal issue: Despite the presence of the Cape Town Convention, India’s domestic legal processes were slow paced to recognise and enforce lessors’ rights, leading to the continued use of aircraft by Jet Airways for an extended period, even after the initiation of the insolvency proceedings. Lessors, particularly the foreign ones, found the Indian insolvency framework lacking in the expedient repossession of their assets.

2. Inability to restructure debt efficiently: The core objective of IBC is to maximise the value of a corporate debtor, either through restructuring or liquidation. In the instant case, the restructuring process was drawn out due to disagreements among creditors, including large debtors like Indian banks. The initial resolution plan was rejected, primarily due to disputes over the valuation of assets, and the inability to agree on the amount of debt to be written off. The debt restructuring process was made more difficult by the lack of operational continuity, as the airline had to ground most of its aircraft. This also led to the depreciation of asset value, making it harder to come up with a realistic resolution plan.

Legal issue: Under IBC, there is a 270 days’ timeline for the insolvency resolution process, after which the company faces liquidation if no resolution plan is approved. In Jet Airways⁵, the timeline was extended several times, highlighting the inefficiency in handling large and complex airline insolvencies.

3. Impact of cross-border transactions: Jet Airways, like many international airlines, had aircraft leased from global lessors, which created significant challenges in coordinating across various jurisdictions. The airline’s insolvency was not limited to Indian stakeholders, but also involved international creditors and lessors based in jurisdictions with varying insolvency laws. The cross-border nature of Jet Airways’ operations, including its leasing arrangements, added to the complexity of the insolvency proceedings, as the Indian insolvency process struggled to interface with international legal standards.

Legal issue: While the Cape Town Convention should ideally streamline the repossession of leased aircraft in cases of default, countries like India have faced issues in fully implementing these international standards, particularly when domestic laws contradict or slow down the process of repossession.

4. Employee and passenger claims: Jet Airways also faced significant pressure from employees and passengers. With over 20,000 employees and thousands of passengers stranded, the insolvency proceedings faced severe public scrutiny. Employee claims, often as unsecured creditors, were a significant burden on the airline’s efforts to reorganise.

Legal issue: The IBC mandates that employee claims are prioritised, but employees’ claims often take a backseat to secured creditors, especially in large-scale insolvencies like Jet Airways. This imbalance can lead to unrest, prolonging the resolution process and decreasing the chances of a successful restructuring.

5. Failure of the resolution process: Despite attempts at a resolution, Jet Airways ultimately failed to return to operations. The creditors’ inability to reach a resolution, the complications in aircraft repossession, and the decline in market confidence in the airline contributed to the failure of the insolvency process.

6. Insufficient consideration of operational continuity: In airline insolvencies, operational continuity is crucial. The inability to quickly restructure the airline or come to a resolution means that assets depreciate, and the company’s value is reduced, further hindering the potential for recovery.

7. Legal and regulatory hurdles: Jet Airways faced numerous legal and regulatory issues, including disputes with creditors, aircraft lessors, and employees. The complex legal and financial situation made it challenging to navigate the resolution process effectively. While India has a growing aviation market, it also has regulatory challenges, including complex taxation, high airport charges, and cumbersome approval processes that can deter investors and hinder profitability.

Conclusion

The insolvency of Jet Airways exposes significant flaws in both national and international legal frameworks surrounding airline bankruptcies. The failure to expeditiously resolve aircraft repossession rights, the inefficiency of the insolvency resolution process under the IBC, and the difficulties in managing cross-border assets are all contributing factors to the prolonged demise of the airline.

The case underscored a systemic problem in India’s insolvency framework: large, asset-heavy industries like aviation struggle to be resolved quickly due to the inability to efficiently liquidate or restructure assets, particularly when they are tied up in cross-border leasing agreements and long-term liabilities.

The case serves as a stark reminder of the difficulties involved in resolving airline insolvencies, particularly when large assets like aircraft are involved, and when the airline has significant operational disruptions and financial distress.

Legal reforms are needed to streamline the insolvency resolution process for airlines, including the effective implementation of international treaties like the Cape Town Convention, better coordination among international creditors, and a more nuanced treatment of operational assets such as aircraft in the insolvency context. Only through addressing these shortcomings can we ensure that airline insolvencies are resolved in a more efficient, timely, and fair manner.